Learning from Soeharto in dealing with slowdown

Anton Hermansyah & Arif Gunawan Sulistiyono

The formula to cure the current economic slowdown may be found in Soeharto’s era, back to 1983 when the country faced similar situation with the problems that the country is currently dealing with.

Principally, Indonesia has similar pattern of economic problems with those happened in the country during the end of 1980’s oil boom era, said an economist at Institute for Development of Economics and Finance (INDEF) Didik Junaedi Rachbini.

In 1983, when 80 percent of Indonesia’s revenue was contributed by oil export, the commodities price slumped and US dollar fluctuated heavily. And now, Indonesia has depended on coal and palm oil export, and facing a sluggish commodities price and volatile Greenback.

It is interesting to know what President Soeharto back then, said Didik.

The general, notoriously known as ‘the smiling general’ despite human rights violations he committed, gathered his economic experts to find a solution. After long-hours of discussion, what they recommended was simple: ‘speed things up’ through deregulation.

In 1983, the government finally allowed state-owned banks to self-decide the interest rate for their deposits and loans. It is the first deregulation launched by the country since the independence day of 1945.

"Then there goes the privatizations. Half of the functions in the finance ministry was handed over to privates at that time," said Didik in an ‘Economic Governance Reform and Leadership Challenges’ discussion, on Monday.

To reform the corrupted customs and smoothen export, Soeharto in 1985 made a swift action by temporarily suspending the Custom Office’s authority in checking export goods, and temporarily handed it over to a team of Geneva-based consultants Societe Generale de Survaillance (SGS).

A year later the general—who was in the status of ‘defendant’ during his last breath due to fraud allegation in his foundation Supersemar, eased the exporter by abolishing export certificate (SE) which previously required for getting export tax allowance as well as subsidy.

To boost the manufacturing industry, run under a campaign of ‘the take-off era’ and taught through the school text book, Soeharto in 1987 abolished the import tax of at least 6 pivotal sectors such as automotive, machinery, electricity, textile, cotton, and steel.

He went further by simplifying the investment licenses in the mining sector, agriculture, pharmacy, and manufacturing sector. He also eased the industry to enter international market by abolishing export permits.

Lastly on Oct. 27 1988, he created the ‘88 October Pact’—which in turn created exploding bubble ten years later, allowing a businessman to create, own, and run a bank with only Rp10 billion, or around Rp70 billion (US$ 5 million) under the current rupiah currency.

In total, Soeharto launched eight deregulation packages in five years (1983-1988) to tame the effect of 1980’s global slowdown. And the result, in general, was quite successful. Soeharto had managed to grow the manufacturing industry by 7 percent in 1990, the highest record of all time.

Debottlenecking
In a bid to deal with the current slowing economy, Didik continued, the exporting and investing activities were indeed very crucial. But unfortunately, both were currently troubled by bureaucratization and complicated regulations in Indonesia.

However, taking a glimpse at the presidential staff office monitoring data, President Joko ‘Jokowi’ Widodo has actually taken similar measures that Soeharto had done, by abolishing unnecessary regulations through deregulation packages in the last 4 months.

From a total of 165 deregulation policies, 135 of them have been issued and/or being processed in the State Secretary for the president’s signing. The rest 30 deregulation bills currently proceeded in the ministerial level, said Presidential Chief of Staff Teten Masduki.

Around 60 percent of the deregulation policies were related to five economic-related ministries: trade ministry (32 regulations), Cooperatives and Small and Medium Enterprises Ministry (29), industry ministry (15), finance ministry (12), and energy-mineral resources ministry (11).

However, the current problem is not laid on the regulatory-side an sich. There is a situation when one can hardly find in Soeharto era, in the form of disharmonious measures made by related government bodies.

Today, as Didik cited, the government is too confident with the tax income target, amid the low interest rate. After setting a high-ceiling tax income target of Rp 1,489 trillion, the tax office had admitted failure, predicting the 2015 tax shortage at around Rp 438 trillion.

"In that situation, the new issuance of government bond will be unavoidable to patch the state revenue. But without high interest rate, the investors would reluctant to buy it, and the government then blaming Bank Indonesia for it," Didik said.

Meanwhile, Faisal Basri, an economist from University of Indonesia said that the bad bureaucracy led to the high cost economy and slashed the profit margin in business realm. This explains why Indonesia heavily depended on commodity instead of manufacturing sector.

"The developed countries are exporting manufactured products due to high profit margin. In Indonesia, the margin of manufacturing industry, such as garments, is just 12 percent. Meanwhile, [the margin] in the extractive industries such as palm oil and cement is more than 40 percent," he said on Monday.

Amid the situation, he further said, the government had yet to be able to stimulate the manufacturers to develop their industry. And we are now wondering, how the current pro-democratic government may beat the authoritarian Soeharto regime in deregulating business.

President Jokowi has issued more deregulation packages than that of in Soeharto era. But as we all already know, the devil usually hides in the implementation. And, we should worry to a fact that the iron-fist usually more effective than the open-hand in implementing policies. (ags)